Federal Reserve Holds Rates Amid Economic Uncertainties
The Federal Open Market Committee wasn’t expected to cut the federal funds rate at yesterday’s meeting, and it didn’t. But it indicated a wait-and-see approach to future actions.
The FOMC statement (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190619a.htm) noted despite continued job gains and low unemployment, other economic conditions have become “soft,” with Fed Gov. James Bullard voting to cut rates by 25 basis points. However, the FOMC elected to hold the federal funds rate at 2-1/4 – 2-1/2 percent, with economic conditions determining future action.
“In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective,” the FOMC said.
Mortgage Bankers Association Chief Economist Mike Fratantoni said the Fed’s job has become more complex in recent months.
“In the Federal Reserve’s statement following the June meeting, they recognized that the economic outlook has become more uncertain, particularly given the weakening in business activity in recent months, both in the US and abroad,” Fratantoni said. “While the statement makes no suggestion that a rate cut is coming soon, it does repeat Chairman [Jerome] Powell’s phrase that the central bank will ‘act as appropriate to sustain the expansion.'”
Fratantoni noted economic projections produced by the FOMC in conjunction with the meeting, however, tell a somewhat different story. The median forecaster on the committee now projects rates to hold steady in 2019, with one rate cut in 2020.
“Looking at the range of forecasts, there are a number of members who are considering cuts as warranted both this year and next,” Fratantoni said. “This was highlighted by the dissenting vote by St. Louis Fed President Bullard, who wanted to cut rates at this month’s meeting. Markets are going to have a difficult time digesting these mixed messages, as it indicates that the Fed recognizes the slowdown, but is not yet committed to cut rates this year.”
MBA is forecasting two rate cuts later this year, believing that the slowdown will continue and will eventually force the Fed to act in line with market expectations. “Longer-term rates are likely already pricing in several rate cuts,” Fratantoni said. “Thus, mortgage rates may be more volatile in the months ahead, which could both provide refinance opportunities for some homeowners, while causing potential homebuyers to pause amidst the uncertainty.”
The full FOMC statement appears below:
“Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
“Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points.”
